Why Xi Jinping’s power grab may not bring faster reforms or growth for China

After doing away with term limits, China’s President Xi Jinping may be the most powerful mainland politician since Chairman Mao Zedong, but the expectations that all that power will spur faster reform and better-quality economic growth may be misplaced, said Julian Evans-Pritchard, senior China economist at Capital Economics.

“More rapid implementation of Xi’s agenda will only boost China’s long-run growth outlook if his agenda is the correct one,” Evans-Pritchard said on Tuesday at the Capital Economics annual conference in Singapore. “In our view, the big problem facing the economy is that state intervention is leading to widespread misallocation of resources, which in turn is causing sustainable growth to slow.”

“To be positive about the significant power that Xi Jinping has accumulated, we’d have to believe that he was going to address this problem and scale back intervention,” he said, adding that instead, things seem to be going backward.

Reforms ‘going backward’

Evans-Pritchard noted that instead of talking seriously about privatization or encouraging competition, state-owned firms are being merged to form national champions.

He noted that China’s state-owned enterprises are “significantly less productive” than the mainland’s private firms and less productive in every sector in which they compete.

“This is because various implicit and explicit forms of government support allow poor-performing state firms to continue operating,” he said, adding the problem wasn’t limited to just the relatively small state-owned corporate sector.

Weaker trend growth

“State intervention has much broader repercussions. It includes industrial plans that steer resources to designated sectors, and as private firms get bigger, they increasingly have to fall in line with what officials want them to do,” Evans-Pritchard said.

With China’s financial system less vulnerable to crises due to a high level of state control the cost of the state intervention was likely to show up in weaker trend growth instead, he said.

That means “the country’s growth rate will fail to live up to expectations,” he said.

Capital Economics’ forecasts for China’s actual economic growth are for 4.5 percent in 2018 and 2019, down from its in-house 5.2 percent growth estimate for the fourth quarter.